The Motley Fool's Rule Maker Ranker Version 3 -- Updated June 2000 Hey Fool, start here! (point your mouse right HERE) Continue Here for Instructions (Please read all three of these competitor comments.) Competitor #1 Competitor #2 Competitor #3 Financial Analysis Company Being Evaluated <Fill in Company Name> Current Period <Date> Income Statement Sales Cost of Goods Sold Net Income Shares Outstanding Balance Sheet Cash & Equivalents Current Assets Short-term Debt Current Liabilities Long-term Debt Cash Flow Statement Operating Cash Flow Capital Expenditures Year-ago Period <Date> Year-over-Year Growth <Fill in Name> Current Period <Date> <Fill in Name> <Fill in Name> Current Period <Date> Current Period <Date> 0 0 0 Margins & Ratios . . . Competitors' Average Gross Margins Net Margins Cash-to-Debt Net Cash Fool Flow Ratio Cash King Margin Continue Here Ranking Rule Makers 1) Brand Familiarity Openness Optimism Legitimacy Inevitability Solitariness Humor Subtotal 2) Financial Location Mass Market Habit Gross Margins Net Margins Cash-to-Debt Fool Flow Ratio Your Interest Subtotal Points (0-1) 3) Financial Direction Sales Growth Gross Margins Net Margins Shares Outstanding Cash-to-Debt Fool Flow Ratio Expansion Potential Subtotal 4) Monopoly Status Gross Margins Net Margins Net Cash Fool Flow Ratio Convenience Subtotal 0 5) Your Enjoyment Points (0-3) 0 Points (0-2) 0 Points (0-4) 0 Total Score 0 Finished? Don't forget to save! Want to modify this sheet? Ranking Rule Makers -- Scoring Criteria 1) Brand Familiarity Is it everywhere? 1 point: passable to excellent 0 points: failure Openness Does it welcome everyone? 1 point: passable to excellent 0 points: failure Optimism Can it promise a slightly better world? 1 point: passable to excellent 0 points: failure Legitimacy Is it accepted by the people? 1 point: passable to excellent 0 points: failure Inevitability Is it becoming a necessary purchase? 1 point: passable to excellent 0 points: failure Solitariness Is it the standout category king? 1 point: passable to excellent 0 points: failure Humor Has it surprised you in the last 5 years? 1 point: passable to excellent 0 points: failure 2) Financial Location Mass Market Habit How often do consumers return for purchase? 2 points: purchased more than once a month 1 point: purchased from once a month to once a year 0 points: purchased less than once a year Gross Margins (Total Sales - Cost of Goods Sold) Total Sales 2 points: above 60% 1 point: 40-60% 0 points: below 40% Net Margins Net Income Total Sales 2 points: above 10% 1 point: 7-10% 0 points: below 7% Cash-to-Debt Ratio Ratio of Cash & Equivalents to Long-term debt 2 points: 1.5 times more cash than long-term debt OR no debt 1 point: from 1 to 1.5 times more cash than debt 0 points: less cash than long-term debt Foolish Flow Ratio (Current Assets - Cash & Equivalents) (Current Liabilities - ST Debt) 2 points: below 1.00 1 point: from 1.00 to 1.25 0 points: above 1.25 Your Interest Your Familiarity and Interest 2 points: user of the products and interested 1 point: familiar with the products and curious 0 points: unfamiliar with the products and uninterested 3) Financial Direction Sales Growth Year-over-year % increase in sales 3 points: above 15% 2 points: from 10-15% 1 point: from 5-10% 0 points: below 5% Gross Margins Year-over-year, Gross Margins have: 3 points: risen 2 points: fallen less than 1 percentage point 1 point: fallen 1 to 3 percentage points 0 points: fallen more than 3 percentage points Net Margins Year-over-year, Net Margins have: 3 points: risen 2 points: fallen less than 1 percentage point 1 point: fallen 1 to 3 percentage points 0 points: fallen more than 3 percentage points Shares Outstanding Year-over-year, fully diluted shares have: 3 points: fallen 2 points: risen 0 to 4% 1 point: risen 4 to 6% 0 points: risen more than 6% Cash-to-Debt Ratio Year-over-year, Cash-to-Debt ratio has: 3 points: No Debt 2 points: risen OR initiated debt but ratio is at least 1.5 1 point: fallen less than 10% OR initiated debt but ratio is < 1.5 0 points: fallen 10% or more Foolish Flow Ratio Year-over-year, Flow Ratio has: 3 points: fallen more than 10% 2 points: fallen from 5 to 10% 1 point: fallen 0 to 5% 0 points: risen Expansion Potential 3 Questions: 1) Do my friends know about and use the company's products? 2) Is worldwide expansion believable for their stuff? 3) Is the company accurately reflecting its performance through conservative accounting? 3 points: you can clearly answer "yes" to all 3 2 points: you pretty much agree 1 point: you're scratching your head in confusion 0 points: plainly "no" 4) Monopoly Status Gross Margins Compared to the competition, Gross Margins are: 4 points: 5 percentage points ahead 2 points: ahead by less than 5 percentage points 0 points: competition has higher Gross Margins Net Margins Compared to the competition, Net Margins are: 4 points: 5 percentage points ahead 2 points: ahead by less than 5 percentage points 0 points: competition has higher Net Margins Net Cash Compared to the competition, Net Cash (measured as Cash minus Debt) is: 4 points: 5x more cash than competition 2 points: 2x more cash than competition 0 points: less than 2x more cash than competition If any of the companies have negative Net Cash, but none have no debt, then: 4 points: Cash-to-Debt is 25% higher than competition 2 points: Cash-to-Debt is higher but not by 25% 0 points: Cash-to-Debt is lower than competition Finally, the last possibilities are: 4 points: Company has no debt, while competition has negative net cash 0 points: Company has negative net cash, while competition has no debt *Note: This is a change from the criteria set forth in Rule Breakers, Rule Makers . We made the change because of the awkwardness of comparing companies, many of which have no debt whatsoever. We substituted Net Cash because this figure gives us a measure of a company's "war chest." Do you agree? Disagree? Bring your ideas to the boards. Foolish Flow Ratio Compared to its foremost competitor, the Foolish Flow Ratio is: 4 points: 25% lower 2 points: lower, but by less than 25% 0 points: higher than lead competitor Convenience Within its industry, product/service accessibility and convenience are: 4 points: the best 2 points: no advantage nor disadvantage versus the competition 0 points: less than the best 5) Your Enjoyment Do you believe you'll enjoy following this business over the years? 1 point: yes 0 points: no Total Score A business can earn seven total points on its branding, twelve on its financial location, twenty-one on its financial direction, twenty on its monopoly status, and one for your enjoyment. All together, that equals a potential 61 points per company. Note: This system of ranking is meant primarily for companies with at least $1 billion in annual sales. Tier Rankings The following tier categories are not buy/sell recommendations in any way, but merely a framework for ranking companies aspiring for the Rule Maker throne. A top tier (50 - 61 points) company represents the best of the best in the business world -- a true Rule Maker. This is the type of business to own for a decade or longer. A second tier (40 - 49 points) company is typically a good investment. One must try to determine whether this company is moving up toward the top tier or falling down to tier three. A third tier (30 - 39 points) business is suffering from a slow-down in operational momentum. This company typically does not have a Rule Maker business model and/or may face fierce competition within its industry. A fourth tier (below 30 points) company may not be an altogether bad business, but it is not a Rule Maker. The Rule Maker Portfolio The Motley Fool's Rule Maker Portfolio is a real-money portfolio whose aim is to buy and hold Rule-Making companies without selling for at least 10 years. This approach has the benefits of low and infrequent trading commissions, low and infrequent taxes, and superior investment performance. Since its inception in January 1998, the Rule Maker Portfolio is beating the S&P 500 Index. Join thousands of other Rule Making investors at www.fool.com/rulemaker to learn more. The Motley Fool The Motley Fool's mission is to educate, amuse, and enrich. 24 hours a day, 7 days a week, millions of investors gather at Fool.com to learn and discuss all aspects of personal finance. Join us!